This is a procedure by which the auditor obtains corroborative evidence regarding the existence, ownership and the value of debtors appearing in the financial statements. This is done by writing directly to the debtors and requesting written confirmation to be sent directly to the auditor.
Purposes for Circularisation
Types of Circularisation
The debtor is expected to respond to the circular if they do not agree with the contents of the circular. The major drawbacks of this method of circularisation is that should the debtor fail to receive the circular and therefore not reply, the auditor may wrongly assume that the debtor is in agreement with the contacts of the circular. Therefore unless the client has a very effective system of internal control or there exists other evidence to enable the auditor satisfy themselves with regard to the purposes of circularisation the negative method should not be used.
The debtor is required to respond to the circular whether they agree or do not agree with the contents of the circular. Accordingly the positive method is the preferred method of circularisation.
The approach for circularisation is as follows: